Importing a texture to a hair

So, I was trying to recolor/retexture a hair, which I have never done before. I have created a new texture, exported the one that was there and you know.. Put my texture in there. When saving it i get a message "Alpha information will be lost". I don't know if this is related to the problem. When I try to import my new texture it says "Your texture must be saved as a  DDS with DXT5 compression. I am using Adobe Photoshop CS2 and i have downloaded DDS plugins. I have saved the file as a DDS file, and checked it, and it says it's a DDS file. What do I do?